To:Budget Committee

From:City Clerk

Subject:Corporate Variance Reporting

Recommendation:

The Audit Committee forwards the report (November 20, 1998) from the City Auditor to the Budget Committee for information and advises having received same.

Background:

The Audit Committee, on December 1, 1998, had before it the report (November 20, 1998) from the City Auditor reporting as requested by the Audit Committee at its meeting on July 21, 1998, on the variance reports on the 1998 City's Budget and recommending that the report be received and forwarded to the Budget Committee for information.

City Clerk,

Audit Committee

Frances M. Pritchard 392-7031

981201.4

attachment

Copy sent to:City Auditor

November 20, 1998

To:Audit Committee

From:City Auditor

Subject:Corporate Variance Reporting

Recommendation:

It is recommended that this report be received and forwarded to the Budget Committee for information.

Reference:

At its meeting on July 21, 1998, the Audit Committee requested the City Auditor, upon receipt of the variance reports on the 1998 City's budget, to review said variance reports and identify any concerns he may have to the Audit Committee.

Discussion:

The purpose of the operating budget variance exercise at the City is to provide periodic reports on the overall gross and net expenditure position of the City of Toronto to date, project expenditures to year end, and explain significant variances, including any corrective action taken or to be taken. The City's first operating variance report was completed for the period ending June 30. A report has been completed for the period ending September 30, 1998, but has yet to be considered by the Budget Committee. A final variance report will be prepared for the period ending December 31, 1998, and will be considered as part of the 1999 budget process.

City departments and local boards were provided with a variance reporting package for the period ending June 30, with instructions that detailed explanations be provided on year to date and projected year end variances at the program level, broken down by payroll, non-payroll and revenue components. Submissions from departments were reviewed by Finance staff and a consolidated report was considered by the City's Budget Committee on September 15, 1998.

My staff have reviewed the June 30th budget variance report. Without performing a detailed analysis of each department within the Corporation, it is difficult to determine the effectiveness and reliability of the information presented. However, based on our review and discussions with Finance and other senior staff throughout the Corporation, it is clear that factors arising out of the amalgamation made the new City's first variance reporting exercise difficult.

Our main concern with respect to the June 30 variance report centers around the reliability of management information provided to departments. Currently, the City's approved 1998 budget is captured at the program level on a central accounting system, while actual expenditures are recorded on five different accounting systems. In order to produce management reports, comparing actuals to budget, actual expenditures from the various civic centre systems are uploaded to the central system on a monthly basis. To this end, it was necessary to convert the old account structures of the various municipalities to a common account structure for the new City. In performing this exercise, various mapping problems (eg. costs converted to an incorrect program) occurred which impacted on the reliability of the information provided to departments with respect to actual revenues and expenditures to June 30. In addition, the monthly management reports available to departments prior to September, reported information at a high level (eg., payroll, non-payroll, etc) and did not include any detail below that level. As a result, it was difficult for departments to analyse expenditures and revenues to date, and effectively project their financial position at year end.

Departments are continuing to monitor revenue and expenditures on a monthly basis and are working with Finance staff to resolve any new or outstanding issues. Finance staff have advised that the number of management reports produced has been expanded and the level of detail enhanced, to assist departments and program areas in managing their expenditures. Finance has also asked for feedback from department heads and administrators on the quality and breadth of the reports with a view to creating new additional reports if necessary. In addition, we understand that Finance staff are working to provide program areas with their respective budget salary database and a snapshot of the actual labour charges being charged to their accounts. Since payroll costs comprise the largest component of departmental budgets, the updated payroll information being developed by Finance, in conjunction with the departments, should be provided to departments as soon as possible. This information will be useful in assisting departments to analyse their payroll expenditures, including the impact of any delays in downsizing, so that their year end position can be more accurately projected and any budgetary pressures for 1999 identified.

Other factors resulting from the transition to the new City have also influenced the quality and reliability of variance reports. For example, in the first half of the year organizational structures were still evolving, numerous senior and middle management staff had exited the Corporation, and the placement of staff in some positions had not yet been completed. Consequently, assigning specific budget accountability in some program areas was difficult, making the analysis and explanation of variances problematic. The nature and extent of variance reporting also varied among the former municipalities, depending on the size and corporate culture of the organization. As such, at least initially, familiarity with variance reporting and the importance placed on it varies somewhat among staff in the new City, which could adversely impact on the consistency and reliability of the information submitted by departments.

The size and complexity of the new City and the budgetary pressures faced by departments leave little room for error in terms of budgetary control and staff can not assume that an over-expenditure in their program area will be covered by an under-expenditure in another program. City Council and the Chief Administrative Officer have also clearly communicated their expectations to departments with respect to the importance of being on budget.

On October 1, 1998, Council adopted the June 30, 1998 Operating Budget Variance Report and additional recommendations made by the Budget Committee. These recommendations, which are provided in the attachment to this report, required among other things that:

• all program budgets be requested to continue to maintain net expenditures within approved budgets;

• agencies, boards and commissions which are projecting over-expenditures at year end, develop appropriate strategies to ensure they will remain on budget for year end and report back to the Budget Committee at its meeting scheduled on October 13, 1998; and

• the Chief Administrative Officer and Chief Financial Officer and Treasurer report to the Budget Committee at its meeting scheduled on October 13, 1998, on various questions and concerns regarding the downsizing delay.

The Chief Financial Officer and Treasurer has advised that in addition to the detailed information requested by the Budget Sub-Committee at its September 15 meeting, there had also been a request to present detailed downsizing and restructuring plans for every department to the newly established Personnel Sub-Committee. A meeting of this sub-committee was held on October 22, 1998. Members of the Budget Committee were present at this meeting and, in considering the presentations from departments, there were requests for additional information. The Chief Financial Officer has indicated that she will address any unanswered questions and include the required information in the September 30 variance report, scheduled to go to the Budget Committee in November.

Finally, it is important to note that with expenditures occurring in multiple locations and accounted for on five different systems, there is an increased risk of a commitment being made without funds being available. Departments and program areas must therefore be more diligent in their approval of expenditures, particularly towards the end of the year, to ensure that funds are available before any commitments are made. It is also important that departmental staff are aware of the requirements covered by the City's interim financial control and purchasing by-laws and that an appropriate delegation of financial signing authority schedule exists within each department and program area.

Conclusion:

Various problems and issues were identified during the June 30 variance reporting exercise. A number of these problems have been resolved, and Finance continues to work with departments to resolve any new or outstanding issues so that subsequent management reports will be more reliable. While the next formal variance report covers the period ending September 30, the Budget Division requested departments to provide information for the period ending August 31, 1998 to assess the reliability of the information and help identify any additional issues and problems that needed correcting before the September 30 variance report. Budget division staff will also continue to review departmental variance submissions in more detail to determine the reasonableness of projections and explanations provided. In addition, the division will monitor key indicators such as the welfare caseload, waste management revenue, interest earnings, TTC ridership, etc. to identify any significant deviations and issues which could affect the City's financial position at year end. We have also been advised that the Chief Administrative Officer reviewed the results of the June variance report and, recognizing the need for early action, requested action plans from those program areas projecting to be overspent at year end. We understand he has received those action plans and has reiterated the need to be on budget in every department and program area. The September 30 variance report will be a better indicator of the financial position of program areas. It must be recognized however, that since we are 10 months into the year, any program areas projecting an over-expenditure may be limited in terms of the corrective action that can be taken in order to ensure that they are on budget at year end.

In order for variance reporting to be effective, information provided to departments must be complete and accurate, and a proper analysis performed to project the estimated year end position. Finance staff have done a commendable job consolidating and producing the new City's first operating budget variance report. Nonetheless, the fact that the City is still operating multiple financial systems combined with the transitional issues resulting from the amalgamation have made the variance reporting exercise somewhat more challenging and management reports less reliable. While the new financial information system will help address many of the current problems, Finance must ensure appropriate compensating procedures and effective management information exist in the interim, to assist departments in their overall responsibility for budgetary control.

Contact Name and Telephone Number:

Tony Veneziano, Senior Audit Manager, 392-8353

Jeffrey Griffiths

City Auditor

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H:\1999PROD\BUDGET\WORKING\990119\ITEM003.WPD